Correspondent Payment

A correspondent payment is a transfer of money between two banks that do not share a common payment system, completed by debiting and crediting accounts that banks hold with each other. Most international bank transfers, often called wire transfers, are correspondent payments. The sender's bank instructs a bank where it holds an account, and that bank in turn pays the beneficiary's bank directly or through further correspondents until the money arrives.

Correspondent payments rely on the network of correspondent banking relationships and on messaging, most commonly over the SWIFT network. They differ from domestic payments through a central clearing system, where every participant settles through accounts at the central bank or a shared operator.

Suppose a customer in Kenya sends US dollars to a supplier in Germany. The Kenyan bank does not hold dollars at the Federal Reserve, so it uses its US dollar nostro account with a correspondent in New York. The New York correspondent debits that account and pays the German bank's dollar correspondent, perhaps through CHIPS or Fedwire. That correspondent credits the German bank's account, and the German bank credits the supplier, converting to euros if instructed. Each bank in the chain is a payment chain participant with its own checks and records.

There are two common ways to send the instruction:

• Serial method. A single customer credit transfer message, historically the SWIFT MT103 and now increasingly the ISO 20022 pacs.008, passes from bank to bank along the same route as the funds. Every bank sees the full payment details.
• Cover method. The sender's bank sends the customer message directly to the beneficiary's bank, while a separate bank-to-bank transfer, the cover payment, moves the funds through the correspondents. Rules introduced after 2009 require cover messages to carry the originator and beneficiary details so that intermediaries can screen them.

Each bank in the chain may take a fee, which is why the amount received can be smaller than the amount sent. The sender chooses who pays charges using the OUR, SHA and BEN charge codes: under OUR the sender pays all charges, under SHA each side pays its own bank, and under BEN the beneficiary bears all charges. Deductions by banks in the middle are described as an intermediary bank fee. When currency conversion takes place, the bank doing it applies its own rate, which may include a margin over the market rate.

Correspondent payments were once known for taking several days and giving little information on progress. Delays arise from time-zone differences, cut-off times, compliance checks and manual repairs when details are incomplete. The introduction of SWIFT gpi, with a unique end-to-end reference and tracking of each step, has made many payments much faster, with a large share credited on the same day. The migration of cross-border payment messages to ISO 20022 allows richer and more structured data, which helps screening and reduces repairs.

Because each intermediary handles payments for customers it does not know, correspondent payments carry money laundering and sanctions risk. Banks apply sanctions screening to every message and must pass on originator and beneficiary information under the FATF travel rule for wire transfers. Payments can be held for investigation, rejected or returned, which adds uncertainty for customers. There is also settlement risk when a bank fails while payments are in progress.

For businesses, the practical consequences of using correspondent payments include the need to provide full and accurate beneficiary details, including the bank's identifier code and account number or IBAN, and to allow time for funds to arrive. Payments that lack information may be returned, often with charges deducted on the way back, and exchange rate movements during the delay can change the final amount received. Treasury teams therefore track payments closely and often keep accounts in major currencies to reduce the number of conversions.

Several approaches aim to reduce reliance on long correspondent chains. These include linking domestic instant payment systems across borders, regional systems that settle in local currencies, multi-currency platforms with local accounts in many countries, and stablecoin settlement for some corridors. The G20 programme for enhancing cross-border payments has set targets for cost, speed, access and transparency that apply to correspondent payments as well as to these alternatives.

• SWIFT
• Financial Stability Board